When you need cash, taking out a payday loan can be a tempting solution. But they’re a really bad way to borrow money. And there are other options to consider.

What you should know

With payday loans, you pay dearly for quick access to cash. Most payday lenders charge much higher interest rates than other lenders.

The most a payday lender can charge you is 15% of the principal amount borrowed. This includes interest and other fees. It may not sound like a lot, but it’s a very expensive way to borrow money.

For example, say you take out a $300 payday loan with a two week term. That 15% charge adds up to $45. This translates into a very high annual percentage rate of interest.

The annual percentage rate of interest tells you how much it costs to borrow for one year. Your 14-day $300 payday loan has a heartstopping rate of 391%. In comparison, a typical credit card has a rate of around 20%.

In other words, taking out a 14-day payday loan is roughly 20 times as expensive as using a credit card. And it’s about 50 times as expensive as borrowing from a line of credit.

Payday lenders may use deceptive tactics to get you to enter into a loan. For example, they may tell you — without being asked — the maximum amount you can borrow. Or they may encourage you to borrow to your limit.

Some payday lenders ask for payment up front before you can borrow. They aren’t allowed to do this.

Some lenders may urge you to buy loan insurance for a fee. The law says they are not allowed to require or request this from you.

Most people taking out a payday loan intend to pay it back quickly — usually within a few weeks. But when you’re paying so much in interest, it can be hard. In fact, many end up taking out a new payday loan to pay off the first.

Payday lenders are not allowed to grant rollovers. This is where a lender gives you a new loan to pay off an existing one. But borrowers might seek out a new lender. And many do. The result can be an endless cycle of high-cost debt.

If you’ve already taken out a payday loan, don’t despair. You may be able to cancel it. See our guidance on cancelling a payday loan.

There are better options

There are cheaper ways to borrow money than payday loans. Here are three of the best alternatives.

One of the best options if you need money right away is a credit card. Most banks offer a promotional rate for the first month or two. Staying on top of your payments will help save you money and build your credit score.

If your credit situation isn’t great, another option is a secured credit card. Many banks offer them to high-risk borrowers. The approval process is much less strict than for a regular credit card. However, the issuer usually requires a cash deposit to guarantee on-time payment.

A line of credit is a great option. Consider opening a small line of credit when you don’t need it and have good credit. Open it, but don’t use it. It can act as a “safety net” you can use when you need it, instead of a payday loan.

If you want to go further, we have more on these options (and more on the risks of taking a payday loan). See our in-depth coverage of payday loans.

This information applies to British Columbia, Canada

Reviewed in December 2019

Time to read: 3 minutes

Reviewed for legal accuracy by

Mario Garcia, Ratcliff & Company LLP

Mario Garcia, a lawyer at Ratcliff & Company LLP in North Vancouver, BC

This information from People’s Law School explains in a general way the law that applies in British Columbia, Canada. The information is not intended as legal advice. See our disclaimer.

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On Dial-A-Law

Dial-A-Law has more information on Borrowing money in the section on Money & debt.